Cameron M. Weber, PhD

St. John’s University

637 41st Street, 4E, Brooklyn, NY 11232, USA

(202) 531-1281

email: cameron_weber@hotmail.com, website: cameroneconomics.com

Paper for Global Business Research Symposium (GBRS)

July 26-28, 2017, University of Cork, Ireland

“The App Economy versus Vested Interests” (note name change from original

abstract submission, thank you.)

Abstract

Creative Destruction is the name Joseph Schumpeter gave to a significant change

in technology which dislodges old technology into new technology and which

leads to increasing economic growth and higher standards of living. This paper

proposes that the current New Economy, or the App, Gig, Free-Lance, Sharing,

Information or Cognitive economy, has this potential for radical economic

transformation. Perfect competition equilibrium, with its focus on maximizing

economic welfare, assumes perfect information and zero transaction costs.

Smartphones and mobile apps introduce radical reductions in information costs and

thus lead to more perfect competition. However creative destruction can make the

status quo obsolete. We observe that vested interests are resisting this radical

change. Several examples are given. Because the new economy is decentralized, it

is difficult to tax and to unionize. Therefore we see that city and state governments

pass laws making it more difficult for room- and ride-sharing apps to do business.

And central banks and national treasuries dislike competition in currency so we

find that digital monies are facing restraints against competition. We also find that

the new economy is radically changing labor markets, where entrepreneurial talent

is becoming an increasingly important factor of production relative to land, labor

and capital.

Keywords: asset specificity, creative destruction, new economy, rent-seeking,

youtube

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Introduction

This research has two main objectives. The first is to theorize the industrial

relationship between the new economy (the “app” economy) and those vested

interests who have economic rents to lose through the creative destruction inherent

as the new economy gains traction over time. Following the economics of

industrial organization, we posit that the new economy is in a position to improve

market efficiency, and therefore improve economic growth and increase standards

of living (from which the reduction in absolute poverty arises). The second

purpose of this paper is to give several specific and contemporary examples of

suppression of the new economy by vested interests, providing evidence for the

theory that it is in the interests of the institutions of the status quo (the “vested

interests”) to use discretionary power to create barriers to entry for new economy

firms as is predicted from our theory that vested interests need protect their rents.

Towards “Perfect Competition” through asset specificity

Most economists agree that the market, as opposed to politics, is the most efficient

way to allocate society’s scarce economic resources.1 A common result in

industrial economics is that the more consumer sovereignty there is (the less

monopoly power a firm has) the more does a given market resemble “perfect

competition” and therefore the efficiency afforded by market exchange. From the

ground-breaking work of Anne Krueger’s “The Political Economy of the Rent-

Seeking Society” (1974) we know that special interests attempt to game the

regulatory system (Krueger uses the example of trade-barriers) to get above-

normal economic profits without having to create value through the market as do

other firms who need seek profits in competitive markets. See Illustration 1 below

which can help clarify the categories of perfect competition and monopolistic

competition.

1 For example see any first-year textbook of economic principles such as Gregory Mankiw’s (the

best-selling author of economics textbooks in the United States), where in his economic

“Principle 1: People Face Trade-offs” he finds that people face trade-offs between the efficiency

of the market and the inefficiencies caused by government intervention in the name of equality.

“In other words, efficiency refers to the size of the economic pie, and equality refers to how the

pie is divided into individual slices” (Mankiw 2015, p. 5, emphasis added).

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Illustration 1: Continuum between perfect competition and monopoly

We find as the industrial organization of a market moves towards the left in the

continuum as found in Illustration 1, towards “perfect competition,” that economic

efficiency is increased (and therefore as well is there reductions in absolute

poverty). The new, “app,” economy has the power to radically change certain

markets due to the reduction in information and transactions costs, as much if not

most consumer information has become instantaneous on the internet. However we

find that vested interests currently benefitting from state enjoined market power

need resist the new economy for self-interest in maintaining historically-derived

market power, examples are given below.

We know from the work of Oliver E. Williamson and others that real life in most

instances does not resemble the textbook “perfect competition,” transactions take

place in specific times and places among specific economic actors. Over time and

under repeated transactions, relationships form among economic actors which

create the status quo patterns of trade and investment, or said another way, market

decisions accumulate into “asset specificities”. Some of these asset specificity

regimes may be harmful to society in that these regimes prevent, rather than

encourage, the factor mobilities which lead to the economic growth brought about

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by entrepreneurial creative destruction.2 It makes sense to assume that vested

interests do not want to face “destruction” of their market powers through new

economy competition.

Vested interest market distortions most commonly take form in barriers-to-entry

or subsidies, and, as we have seen most predominantly recently in reaction to the

2008 Financial Crisis, overt bailouts of specific firms in specificity regimes with

government decision-makers. As Krueger 1974 highlights more and more rent-

seeking (by asset specificity regimes, author) will eventually prevent the market

from efficiently allocating society’s scarce resources. This explanation is a

plausible one for the lower economic growth we have experienced since the

financial crisis and bailouts of bankrupt assets, these interventions can be seen as

unprecedented in American economic history and that’s why the familiar refrain on

the ‘new normal’ of 2% real growth instead of 3% growth or more prior to the

reactions to 2007-8 is probably an accurate one, though this could change with

supply-side reforms.

The New Economy and its opposition in vested interests: Monetary and tax

authorities

In this paper we are identifying markets being transformed by the new economy,

specifically industries where internet and smartphone technologies are rapidly and

radically reducing transactions costs, most specifically in the form of reduced

information costs (a reduction in information costs again leading from

monopolistic competition towards more perfect market competition). In identifying

these markets concurrently, we are able to deduce vested interests who are opposed

to the creative destruction brought about by our current technological revolution.

The special treatment of new economy tech firms came to my attention most

predominantly with the Apple tax case brought by the EU against both Ireland and

Apple, ultimately resulting in Apple paying a past-due tax bill of €13bn (Farrell

2 See Weber 2017 for an example of asset specificity regimes based around the bailout and

nationalization of General Motors by the US government in 2009, where we find that despite

having accumulated debts of more than $30 billion over a 20-year period GM gets bailed-out to

the detriment of the rule of law and creative destruction through bankruptcy and to the benefit of

the United Auto Workers, who were big donors to the Obama (and of course other Democrats)

campaign. The paper describes the historical emergence of the US government – UAW asset

specificity regime during the 1970s through today, both Republican and Democrat

administrations at national and local levels have given special treatment to domestic automobile

manufacturing and distribution.

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and McDonald 2016).3 It became clear that the EU is not interested in policy

competition for the attraction of investment, rather the EU is interested in holding

on to its power to regulate tax codes throughout the EU member states. Thus

centralized tax authorities are one vested interest which can be seen as suppressing

movements towards perfect competition, in that the regulatory burdens (increased

transaction costs) are for firms are to comply with the EU rather than directly with

the nations in which they invest.

This conclusion is reiterated with the recently concluded EU tax case against

Google and Italy, where Google was required to pay an EU-determined €306m in

back taxes (Politi 2017). What distinguishes tech firms in relation to bricks and

mortar industries is that much of what they do is invisible to tax authorities,

internet transaction are decentralized and peer-to-peer, denying tax authorities easy

solutions to complex tax issues. The expense of complying with opaque EU

regulation is one way to suppress firms which are seen as too successful and

therefore a threat to the status quo by EU regulators.

An example of tax (and monetary) authorities using their monopoly on power to

tax and to print money is seen by the case of Bitcoin in the USA. In March 2014

the United States Internal Revenue Service (US IRS) declared Bitcoin and other

digital money as “property” (e.g., not as legal tender), therefore taxing alternative

currencies under the capital gains tax (US IRS 2014). The state simply does not

want the competition of digital currencies, which are hard to trace as compared to

the formal banking system regime specificities (which are based on monopoly

central bank and treasury regulation and monopoly fiat currency issuance.)4

The policies since the 2008 Financial Crises have been that of “easy money” in

the form of monetary stimulus, which occurred in the USA for almost 8 years and

which continues in Europe and Japan. Easy money means devalued money, so

competition in currencies offered by digital money would provide unwanted

3 For context the successful “Brexit” vote in the UK was June 23, 2016, two months before the

final ruling in the Apple-EU tax case.

4 It is not well-known that the shareholders of the Federal Reserve Bank are private banks, not

the US government. This is another example of state policy and regulation giving which are now

vested interests monopoly power. This special interest asset specificity regime is at risk under the

creative destruction inherent in the new economy, for example this year the the blow back

against crypto-currencies. The shareholders of the Fed get guaranteed year-in year-out returns of

6% - mostly from the interest on government bonds held by the Fed seignorage in money

issuance. The Fed transfers all central bank profits beyond those giving to shareholders to the US

treasury, something I like to refer to as “monetary cronyism” (Brown 2016).

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competition for the monopoly currencies under current tax and monetary

authorities. The IRS has gone so far as to request transactions records from

alternative currency trading platforms (Porter 2016), again an attempt to save the

power of the vested interests through non-market interventions, suppressing

competition and the most efficient allocation of resources under the potentials

offered by the new economy.5

The New Economy and its opposition in vested interests: The sharing economy

Rideshare

Much of what we gain through today’s technological revolution is what we can call

the ‘sharing economy’. This phenomenon is most predominant with rideshares and

homeshares where apps like Uber and Airbnb monetize assets which may

otherwise go to waste. For example most cars are parked 95% of the time (Morris

2016) and many home-owners have extra rooms (empty nesters for example).

Rideshare and homeshare digital applications make these otherwise unused assets

available to the economy increasing well-being and standards of living. However

these sharing platforms also face vested interests who do not like the competition

that these apps bring.6

Let’s start with ride-sharing apps. The most obvious vested interest against ride-

sharing apps are city-sanctioned taxi services. Taxi permits by definition limit the

supply of taxi-services and therefore by definition create greater profits than if

there were not this regulation.7 Taxi cartels are also a source of political patronage

5 F.A. Hayek after studying monetary economics for more than 50 years argued for the

“denationalization” of money, in order to keep state money honest. Hayek was writing in context

against the creation of the Euro (€) as a common fiat-monopoly for Europe, but the economic

arguments hold in all nations with fiat-monopoly money (Hayek 1990).

6 The European Court of Justice is currently (May 2017) deliberating whether Uber is a “car

service” or a “platform,” which will determine its regulatory future in the EU (Orlowksi 2017).

Gutteridge (2017) finds that if the EU court determines Uber a car service that it will be

regulated out of existence in the EU. 7 Holodny 2016 reports that New York City taxi tokens have decreased in value from around

$1.3 million in 2014 to less than $500,000 today (early summer 2017). This is an example of the

creative destruction about which vested interests are fearful. NYC taxi tokens are traded through

nycitycab.com.

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for city politicians, who grant the taxis their special privileges and city treasuries

receive steady and predictable taxes from these city licensed taxi-drivers.

Rideshare apps (platforms) provide competition against the taxi asset specificity

regime and therefore these vested interests tend to suppress rideshare apps when

possible. For example, where were the Paris police during the anti-Uber protests of

June 25, 2015 when taxi-drivers blocked roads to and from airports and rail-

stations (Thomson and Bennett 2015)?8

Rideshare apps are decentralized and drivers are independent contractors, this

has two implications. Rideshare platforms are not as easily visible as are for

example the yellow cabs in New York City and the black cabs in London. This

very invisibility itself is a threat to the vested interests in that the rideshares are less

visibly taxable, this is annoying to city politicians and city treasuries. There are

also labor market implications. Labor unions are important to city politicians as a

well-known source of campaign contributions and votes. City, local and national

governments and labor unions have formed a strong asset specificity regime over

many decades.9

8 In 2016 the Los Angeles Police Department entrapped and arrested 240 rideshare drivers for

accepting cash for rides (Hunter 2016). Uber’s use of “Greyball” technology is of course a way

to reduce entrapment transactions costs as a means of doing business (WSJ 5/5/2017). The

classical liberal view is that competition creates innovation and moves markets towards perfect

competition, albeit with disruptions in the short-term. It is these short-term disruptions which

politicians and their coalitions are concerned about as it reduces discretionary control. 9 In particular in the USA it was the National Labor Relations Act, or the Wagner Act, of 1935

which gave unions monopolistic bargaining power by bringing legal action for redress against

union-caused damages to the administration rather than the civil court system. Unionization

tripled under the FDR administration after the Wagner Act (Higgs 1987).

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Illustration 2.

Anti-rideshare taxi strike in downtown London, September 2015 (photo from Crossley 2015)10

It is very difficult to organize rideshare drivers into unions due to their

decentralization and relative invisibility so unions in general (and not just taxi

unions, for example public transportation unions11 and police and civil service

unions are part of the anti-rideshare asset regime) are against the sharing-economy

due to the creative destruction that independent contractors are bringing to the

labor force in the new app economy.12

10 In September 2016 London Mayor Sadiq Khan announces a £65m program of support for

London’s black cabs to include subsidies for new vehicle purchases and a city-provided and

paid-for cab app. In addition 20 new London bus lanes are added, which can be used by black

cabs but not rideshare drivers (The Telegraph 2016).

11 The MTA, which is predominantly union labor, in the New York City area is more than $34

billion in debt (Evans 2015)

12 The concept of vested interests is nothing new, see Polanyi (1992) where the church (ie. tithes

via land ownership) and the manor and political system in England are organized against free

trade in agriculture goods. The Corn Laws are finally over-turned in 1846 after more than 40

years of agitation for reform, and becomes law only after the potato famine causes relative

starvation and out-migration for many Irish people.

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Most importantly it is the consumer who gains (the consumer sovereignty of

markets with more perfect competition than monopolistic characteristics) with

lower cost and better service with the rideshare apps as opposed to state monopoly

taxis. With monopoly power taxi-drivers do not have the incentive to innovate in

service delivery. Rideshare innovation with almost instantaneous access in mass

markets to rides at any time of the day move the transportation market away from

cartelization and monopoly and towards perfect competition, and this

transformation obviously must face resistance in vested interests.

The New Economy and its opposition in vested interests: The sharing economy

Homeshare

Homeshare platforms are another means to unfetter assets in order to create value

in market exchange which would otherwise be under-used. It is obvious that the

most vested interest against homeshare innovation is the hotel specificity regime.

Cities which are attractive to tourists can charge 15% hotel tax and the hotel

industry lobby, and concurrent hotel worker unions, are well-organized, with most

large cities in the USA being under Democrat (pro-union) mayors. City treasuries

(and therefore by definition city politicians who favor spending programs) find

homeshares a problem as the decentralized and anonymous nature of the internet

poses a threat to the hotel regime and its steady source of taxation for city

treasuries and the steady unionization of hotel workers.13

The American Hotel and Lodging Association (the association) is encouraging

the US Federal Trade Commission investigation that Airbnb is a cause of

increasing housing costs in American cities (see Illustration 3 which counters this

claim by showing that Airbnb rentals have been less than hotel rentals in New

York City over the last year).

The association also met with legislators and attorneys general in dozens of other states

[other than New York, author] to discuss how Airbnb hosts often do not comply with

rules imposed on hotels, like anti-discrimination legislation, local tax collection laws, and

safety and fire inspection standards. In some markets, the group says, Airbnb is dodging

13 Homeshares are even more invisible to tax for regulatory authorities than are rideshares,

therefore regime competitive backlash is less obvious and organized than that of the more

conspicuous rideshares.

10

paying local lodging taxes. In other places, it encouraged officials not to collect taxes so

as not to legitimatize short-term rentals (Benner 2017).14

As we can see the regulatory state of play for the sharing economy is being

negotiated contemporarily, with the new economy having to fight the vested

interests in court and regulatory arbitrage rather than in value creation for

consumers in the market.15 For example Airbnb settled its lawsuit with the city of

San Francisco by requiring that hosts using the Airbnb platform obtain city

licenses through the Airbnb website (Dickey 2017).16 The settlement of the New

York City Airbnb case is that renters, not the Airbnb platform, are responsible for

registering with the city and are responsible for the up to $7,500 fee for not doing

so, rather than Airbnb being required to pay the regulatory fee (Benner 2016).

As found above the regulation of much of the new economy is in how the courts

define platforms as direct service providers. The results of these locational

legislatative deicsions might provide a good proxy in economic geography for how

‘liberal’ a regime is toward creative destruction or towards old-fashioned

cronyism.

14 It could be argued that city regulatory agencies for rental property are made obsolete with the

app economy as on-line reputations through instantaneous consumer feedback are more relevant

to potential consumers than is a government license.

15 It could be argued that city regulatory agencies for rental property are made obsolete with the

app economy as on-line reputations through instantaneous consumer feedback are more relevant

to potential consumers than is a government license.

16 Note that this resolution in San Francisco side-steps the issue of whether Airbnb is a service or

a platform. The question still remains if Airbnb is legally responsible for its platform clients to

register with the city. New Orleans, Chicago and Denver have the same “process” as does San

Francisco (Dickey 2017). See https://www.airbnb.com/help/article/871/san-francisco--ca for

Airbnb’s guidance to its San Francisco drivers. Airbnb hosts are independent contractors as are

Uber drivers, responsible for paying their own taxes on income, though it appears Airbnb might

be a tax-collector for the city of Paris (The Guardian 2016).

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Illustration 3.

Data source: statista.com.

Hotel room costs 1. $276 per night; Airbnb costs 2. $157 per night

The New Economy and its opposition in vested interests: Youtube

Youtube is unique in the streaming world as for the most part it is free (if you

ignore the adverts) as opposed to Spotify and Apple Music which pay royalties (as

opposed to or in addition to advertising revenues) to the artists. In this case of

course in opposition to Youtube is the asset specificity regime who gains profits

from the copyrights on individual performances and songwriting. Therefore we

find the Recording Association of America, which represents major labels, against

the new economy Youtube (Sisario 2017).

Youtube is a platform which advises its content uploaders when copyright claims

are lodged against them. Major recording artists (from personal experience, Bob

Dylan) have their copyrighted content scrubbed from youtube in a timely manner.

This Youtube monitoring of course may be resource intensive for copyright

holders, although the music copyright asset specificity regime appears to be

embracing in general the new economy rather than seeking rents against its

competition, for example paid music streaming revenue is up 11% in 2016 from

2015 (Sisario 2017).

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Explanation and Conclusion

As theorized and shown empirically we are in a new, app, economy where

entrepreneurship / independent contracting is changing labor relationships and

transaction costs in certain industries, moving these sectors towards more perfect

competition and therefore resulting in increasing standards of living (see fn 1).

However new higher standards of living through the creative destruction process

in society through the app economy can only be realized through competition,

competition which as we have seen has been thwarted by many (but not all, see

streaming music above) vested interests (politicians, public and private unions and

copyright holders and associations, cable companies, city and national treasuries

and monetary policy-makers) given the specific circumstances in the cases as

described.

Despite optimism over people’s innovations in the market only time will tell,

perhaps a generation or more (as only recent generations have grown-up with

smartphones), if indeed we are in a revolutionary “new” economy due to the

technological advances of the smartphone and the satellite internet. The rate of

change in the new economy will depend on how well vested interests protect their

positions versus how free markets allow entrepreneuriship without undue anti-trust

litigation increasing transactions costs.

The internet revolution is occurring with or without the concurrence of the state.

An intelligent state might seek ways to gain as well from the tech revolution, by

allowing more competition and negotiation and less regime-specific lawsuits,

regulatory burdens, and labor blockages and even riots in certain cases.17

17 https://www.youtube.com/watch?v=WfJQmuYIFCg , accessed 27 May 2017

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